Blockchain, Smart Contracts, and Commercial Real Estate

By Luke Feldman & Christian Harden

For most people, 2017 was the year they heard about bitcoin and learned enough about the cryptocurrency to forget within 24 hours. We’ve all had that friend claiming to be a brilliant investor because they bought $50 worth of litecoin and ethereum before prices exploded in late October. We’ve all heard how cryptocurrency is the future of finance. While there might actually be some truth in that statement, we in commercial real estate are more intrigued by the endless possibilities of blockchain. Blockchain is the actual basis of bitcoin technology, and it will certainly impact the way real estate professionals conduct business in the future.

Real estate technology has come a long way over the past few decades. Companies like Airbnb, Home Link, Katerra, ProCore, WeWork, and Houzz have all demonstrated that a technology-driven companies in the real estate industry have tremendous potential (CrunchBase). While real estate as an industry has been slow to adopt technology relatively speaking, blockchain may introduce unique efficiencies and consistencies that would benefit consumers as well as save real estate brokers, lawyers, and other related professionals time and money.

What is Blockchain?

Blockchain is an encrypted software technology that manages records of transactions. It uses a ledger system that shares information with every computer connected to the network in an anonymous manner (Spielman 4).

Imagine, for a moment, a global, online ledger, or network of ledgers, listing every single transaction in the world. It’s verified immediately by other people using the system, which protects people’s privacy, but is transparent enough to allow for oversight from anyone. No one group regulates it, so it’s neutral and accessible to anyone with a computer. That is the world that visionaries of the blockchain foresee (LaChance).

This would be particularly useful in the real estate industry, because current technology does not connect all databases, leading to inconsistencies in listing information, or discrepancies in contracts.

What are Smart Contracts?

Smart Contracts are computer programs that put the provisions of a contract in the form of code, and then distribute them across the blockchain ledger (Spielman 4). These contracts use if-then statements to automate actions such as: if the tenant occupies the space, then the digital wallet will transfer rent from the tenant to the landlord on a certain date.

Blockchain, Smart Contracts, and Commercial Real Estate

Negotiating leases and enforcing lease terms are two difficult areas in real estate contracts that can be simplified with the use of blockchain technology. Currently, lawyers add value through the customization of leases, since no two are the same. However, the current process is complex and costly, and would benefit from standardizing leases through the codification seen in smart contracts. This way, creating, executing, and redlining a lease during negotiations could all be executed on one document, while the ledger records each change to the lease (Spielman 8). With smart contracts, all parties will be able to work off of one document, which eliminates countless back-and-forth emails and protects against stealthy changes (9).

Standardizing leases is not a new idea, and it is common for brokers and lawyers to use templates. However, this is potentially the first time that leases will be written in programmable code using if-then statements rather than convoluted prose (Spielman 8). Contracts in the former leave less up to interpretation, and in turn would make contracts easier to enforce.

Real estate is a continually changing industry, as technology continues to affect the way we do business. Everything from the introduction of crowdfunding sites, to analytical platforms like Compstak, to even the changing retail landscape due to e-commerce, all allow capital to flow into our industry because of technology. Embracing new technology is a choice, but if you choose not to adapt, you may find yourself in the same situation as a brick-and-mortar store that refuses to offer an experience or online platform.